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Blue Star: In flattish growth trajectory

Oct 29, 2013

Blue Star has announced second quarter results for financial year 2013-2014 (2QFY14). The company reported a 1.1% YoY increase in sales while net profits grew by 3.4% YoY. Here is our analysis of the results.

Performance summary

Standalone topline increases by around 1.1% YoY during 2QFY14. This was mainly due to a 0.6% YoY decline in the Electro Mechanical & Project Services (EMPS) segment. Revenues from Cooling Products (CP) were also flat with a growth of 0.1% YoY. However, revenues from Professional Electronics and Industrial Systems (PEIS) segment increased 24.7% YoY.

The operating profits grew by 12.2% YoY during the quarter. Growth in operating profits came on the back of just 0.7% YoY increase in total expenditure.

Net profits increased 3.4% YoY. Increase in interest expenses (+14.3% YoY) and fall in other income (-6.2% YoY) led to a moderate growth in profits.

Order book as on 3oth September 2013 stood at Rs 17.4 bn, representing a 4% YoY growth.

Standalone performance snapshot

(Rs m)

2QFY13

2QFY14

Change

1HFY13

1HFY14

Change

Income from operations

5,786

5,850

1.1%

13,100

13,558

3.5%

Expenditure

5,585

5,624

0.7%

12,563

12,948

3.1%

Operating profit (EBDITA)

202

226

12.2%

537

610

13.7%

Operating profit margin (%)

3.5%

3.9%

4.1%

4.5%

Other income

65

61

-6.2%

135

105

-22.5%

Interest

112

128

14.3%

237

245

3.2%

Depreciation

82

84

2.5%

156

167

6.8%

Profit before tax

73

75

3.4%

278

303

8.9%

Tax

-

-

-

-

-

-

Profit after tax/(loss)

73

75

3.4%

278

303

8.9%

Net profit margin (%)

1.3%

1.3%

2.1%

2.2%

No. of shares

89.9

Basic & diluted earnings per share (Rs)

3.4

P/E ratio (x)*

24.7

*On a trailing twelve month basis.

What has driven performance in 2QFY14?

Blue Star's net sales increased 1.1% YoY during 2QFY14. Strong performance from the PEIS segment (+24.7% YoY) was offset by a 0.6% YoY decline in the EMPS segment. Revenues from the CP segment were flat during the quarter.

Revenues from the EMPS segment declined 0.6% YoY due to execution issues. As a result, margins also suffered and were down to 5.4%. The segmental working capital increased to Rs 4.8 bn from Rs 4.6 bn in the preceding quarter due to rising inventory and receivables. Revenues from the CP segment increased 0.1% YoY. It may be noted that second quarter is generally a lean season for the cooling business hence growth was relatively muted.

Revenues from the PEIS segment increased by 24.7% YoY while margins increased to 19.6% in 2QFY14 from 7.7% in 2QFY13. Offtake in the industrial projects business resulted in strong growth and thus profitability.

Segment-wise performance

(Rs m)

2QFY13

2QFY14

Change

1HFY13

1HFY14

Change

Electro-Mech. Proj. & Packaged A/C Sys. (EMPS)

Revenue

3,759

3,737

-0.6%

7,429

7,161

-3.6%

% share

65.0%

63.9%

56.7%

52.8%

PBIT margin

7.0%

5.4%

5.2%

5.6%

Cooling Products (CP)

Revenue

1,686

1,688

0.1%

5,023

5,651

12.5%

% share

29.1%

28.9%

38.3%

41.7%

PBIT margin

4.7%

4.8%

9.1%

8.9%

Professional Electronics & Industrial Systems (PEIS)

Revenue

341

425

24.7%

649

746

15.0%

% share

5.9%

7.3%

5.0%

5.5%

PBIT margin

7.7%

19.6%

15.1%

15.7%

Total

Revenue

5,786

5,850

1.1%

13,100

13,558

3.5%

PBIT margin

6.4%

6.2%

7.2%

7.5%

The operating profits increased 12.2% YoY with margins improving by 40 bps. Modest growth (+0.7% YoY) in total expenditure led to expansion in operating profits.

Net profits increased by 3.4% YoY. Decline in other income by 6.2% YoY and increase in interest expense (due to higher forex losses) impacted growth at the bottomline level.

What to expect?

At the current price of Rs 150, the stock is trading at a multiple of 24.7x its trailing twelve month earnings. The slow moving jobs that were in system during last quarter still remain stagnant. It may be noted that approximately Rs 3-3.5 bn of slow moving jobs are still there in the system. While management expects to close them by the end of the year it did not rule out the possibility of spill over to the next fiscal year. Further, it should be noted that these orders are in the system since more than 2 years which has been impacting the performance. As far as the EMPS margins are concerned, management expects the full year margin to be in the region of 4% despite a strong performance (5.6% margin) in 1HFY14. The ordering environment is quite muted hence competitive intensity is on a rise. This may put some pressure on margins.

Taking into consideration the above factors we maintain our HOLD view on the stock. We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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